Principles of Taxation

Taxation is a mode of raising revenue for public purposes.

It is a process inherent in every state to exercise the power to exact enforced proportional contributions imposed upon persons, properties, or rights to raise revenues in order to defray the necessary and legitimate expense of the government.

Inherent Powers of the State

Taxation is the power of the State to demand from the members of society their proportionate share or contribution in the maintenance of the government.

Police Power is the power of the State to regulate liberty and property for the promotion of general welfare.

Eminent Domain is the power of the State to forcibly acquire private property, upon payment of just compensation, for some intended public use.

Similarities

Inherent in the State and need not be conferred by the Constitution;
Indispensable in that the State cannot continue or be effective unless it is able to exercise the same;
Methods whereby the State interferes with private rights;
Presuppose an equivalent compensation, tangible or otherwise, for the private rights interfered with; and
Primarily exercised by the legislature.

Differences

	Taxation	Police Power	Eminent Domain
Purpose	Raise revenue	General welfare	Social justice
Concept	Enforced contribution	Regulation	Public use
Authority	National Government or Political Subdivision	National Government or Political Subdivision	National Government or Political Subdivision; may be granted to public service companies or public utilities
Benefits Received	Protection and benefits from the government	Indirect Benefits	Market Value of the Property
Amount Imposed	No limit	Commensurate to cover cost of license and necessary expenses	No amount imposed; the owner is paid just compensation

Theory and Basis of Taxation

The following are the theory and bases of taxation. They answer why Government Can Impose Tax?

Lifeblood theory
Necessity theory
Benefits-protection Theory (Symbiotic Relationship)
Jurisdiction over subject and objects

Lifeblood Theory

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance.

Because of lifeblood theory

Collection of taxes cannot be enjoined by injunction.
Taxes could not be the subject of compensation or set off.
A valid tax may result in the destruction of the taxpayer’s property.
Taxation is unlimited and plenary power.

Necessity Theory

The power of taxation proceeds upon the theory that the existence of government is a necessity; that it cannot continue without means to pay its expenses; and that for those means it has the right to compel all citizens and property within its limits to contribute.

The power to tax is an attribute of sovereignty.

It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry:

an army to resist aggression;
a navy to defend its shores from invasion;
a corps of civil servants to serve;
public improvement designed for the enjoyment of the citizenry and those which come within the State's territory; and
facilities and protection which a government is supposed to provide.

The obligation to pay taxes rests upon the necessity of money for the support of the state. For this reason, no one is allowed to object to or resist the payment of taxes solely because no personal benefit to him can be pointed out.

Benefits-Protection Theory

Taxation is founded on the reciprocal duties of protection and support between the State and its inhabitants.

Taxpayers - despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government.

Government - the Government should respond in the form of tangible and intangible benefits to improve the lives of the people and enhance their moral and material values.

Purpose of Taxation

Revenue-raising

The primary purpose of taxation on the part of the government is to provide funds or property with which to promote the general welfare and the protection of its citizens and to enable it to finance its multifarious activities.

Non-revenue/special or regulatory (a.k.a. Sumptuary Purpose)

Taxation is often employed as a device for regulation by means of which certain effects or conditions envisioned by governments may be achieved.

Promotion of general welfare– taxation may be used as an implement of police power to promote the general welfare of the people.
Regulation of activities/industries – Taxes may also be imposed for a regulatory purpose as, for instance, in the rehabilitation and stabilization of a threatened industry which is affected with public interest, like the oil industry (Caltex Philippines, Inc. v. Commission on Audit, et al., G.R. No. 92585, May 8, 1992).
Reduction of social inequality – a progressive system of taxation prevents the undue concentration of wealth in the hands of few individuals. Progressivity is based on the principle that those who are able to pay more should shoulder the bigger portion of the tax burden.
Encourage economic growth – the grant of incentives or exemptions encourage investment thereby stimulating economic activity.
Protectionism – Protective tariffs and customs duties are imposed as taxes in order to protect important sectors of the economy or local industries, as in the case of foreign importations.

Nature of the Power of Taxation

The power of taxation is Inherent in sovereignty, Legislative in character, and Subject to constitutional and inherent limitations

Inherent in sovereignty. Taxation is innate, inborn in very state. What presupposes the power to tax is the sole existence of a state. A state does not need a constitutional grant for it to possess the power to tax.

Legislative in character. Only Congress can impose taxes. It cannot be exercised by the executive or judicial branch of the government. This is based on the principle that taxes are grant of the people who are taxed, and the grant must be made by the immediate representative of the people, and where the people have laid the power, there it must remain and be exercised.

Subject to constitutional and inherent limitations. The power of taxation is subject to constitutional and inherent limitations. These limitations are those provided in the fundamental law or implied therefrom, while the rest spring from the nature of the taxing power itself, although they may or may not be provided in the Constitution.

Inherent Limitations

The following are the Inherent Limitations of the power of taxation:

Public purpose
Inherently Legislative
Territorial
International comity
Tax exemption of government entities, agencies, and instrumentalities

Public purpose

To raise revenues in order to defray the necessary and legitimate expenses of the government. The proceeds of the tax must be used for

the support of the State or
some recognized objects of government
directly to promote the welfare of the community.

Tests for determining public purpose include the following:

Duty Test	Is the tax in furtherance of the duty of the State as a government to provide?
Promotion of General Welfare Test	Will the tax directly promote the welfare of the community in equal measure?
Character of the Direct Object of the Expenditure	Is the public welfare ultimately benefited by the promotion of the direct object of the expenditure?

Inherently Legislative

General rule:

Potestas delegatas non potesst delegari, literally means, what has been delegated can no longer be delegated. As a rule, only the Congress (to whom the legislative power has been delegated by the people) can exercise the power of taxation. The scope of legislative power to tax includes the power to determine the tax base and the tax rate.

As exceptions to the above rule the power of taxation can be delegated as follows:

Delegation to the President (Art. 6, Sec. 28(2), 1987 Constitution)

The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose,

tariff rates,
import and export quotas,
tonnage and wharfage dues, and
other duties or imposts within the framework of the national development program of the Government.

Delegation to local government units (Art. X, Sec 5, 1987 Constitution)

LGUs are expressly given the power to create their own sources of revenue and to levy taxes, fees, and charges, subject to such guidelines and limitations as Congress may provide which must be consistent with the basic policy of local autonomy.

Delegation to administrative agencies

There are certain aspects of the taxing process that are not legislative and they may, therefore, be vested in an administrative body.

For delegation to be constitutionally valid, the law must be complete in itself and must set forth sufficient standards.

The powers which are not legislative include:

the power to value property for purposes of taxation pursuant to fixed rules;
the power to assess and collect the taxes; and
the power to perform any of the innumerable details of computation, appraisement, and adjustment, and the delegation of such details.

The following powers cannot be delegated:

the determination of the subjects to be taxed;
the purpose of the tax, the amount or rate of the tax;
the manner, means, and agencies of collection; and
the prescribing of the necessary rules with respect thereto.

Territorial

A state may not tax property lying outside its borders or lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege derived from the laws of another state and therein exercise and enjoyed.

Reason:

Tax laws cannot operate beyond a state’s territorial limits.
Property outside one’s jurisdiction does not receive any protection from the state.

Privity of Relationship

A person may be taxed where there is between him and the taxing state, a privity of the relationship justifying the levy.

Thus, the citizen’s income may be taxed even if he resides abroad as the personal (as distinguished from territorial) jurisdiction of his government over him remains.

International comity

Comity means the respect accorded by nations to each other because they are sovereign equals. Thus, the property or income of a foreign state or government may not be the subject of taxation by another state.

Reasons of limitations:

In par in parem non habet imperium (Sovereign Equality among states)
Immunity from suit
Usage among states

In par in parem non habet imperium (Sovereign Equality among states)

As between equals there is no sovereign (Doctrine of Sovereign Equality among states under international law). One state cannot exercise its sovereign powers over another.)

Immunity from suit

In international law, a foreign government may not be sued without its consent. Therefore, it is useless to impose a tax which could not be collected.

Usage among states

Usage among states that when a foreign sovereign enters the territorial jurisdiction of another, there is an implied understanding that the former does not intend to degrade its dignity by placing itself under the jurisdiction of the other.

Tax exemption of government entities, agencies, and instrumentalities

General Rule: Agencies and instrumentalities of the government are exempt from tax.

Exception: There is no constitutional prohibition against the government taxing itself.

Reasons for the exemption:

Government will be taxing itself to raise money for itself.
Immunity is necessary in order that governmental functions will not be impeded.

Application of Exemption

Unless otherwise provided by law, the exemption applies only to government entities through which the government immediately and directly exercises its sovereign powers.

With respect to government-owned or controlled corporations performing proprietary (not governmental) functions, they are generally subject to tax unless expressly exempted by law.

Exempt GOCCs

The following GOCCs are exempt from income tax:

Government Service Insurance System (GSIS)
Social Security System (SSS)
Philippine Health Insurance Corporation (PHIC)
Local Water District (LWD)

For the list above, there is no requirement that its income must be derived from the exercise of its essential function.

Constitutional Limitations

The following are the constitutional limitations to the power of taxation:

No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws. (Article III, Section 1, Constitution)

The privacy of communication and correspondence shall be inviolable except upon lawful order of the court, or when public safety or order requires otherwise, as prescribed by law. (Article III, Section 4)

No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. No religious test shall be required for the exercise of civil or political rights. (Article III, Section 5)

No law impairing the obligation of contracts shall be passed. (Article III, Section 10)

No person shall be imprisoned for debt or non-payment of a poll tax. (Article III, Section 20)

All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills, shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments. (Article VI, Section 24)

The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object. [Article VI, Section 27(2)]

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. [Article VI, Section 28(1)]

The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government. [Article VI, Section 28(2)]

No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress. [Article Vi, Section 28(4)]

No public money or property shall be appropriated, applied, paid, or employed, directly or indirectly, for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion, or of any priest, preacher, minister, other religious teacher, or dignitary as such, except when such priest, preacher, minister, or dignitary is assigned to the armed forces, or to any penal institution, or government orphanage or leprosarium. [Article VI, Section 29(2)]

All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government. [Article Vi, Section 29(3)]

Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may provide, final judgments and orders of lower courts in All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto. [Article VIII, Section 5]

Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments. [Article X, Section 5]

Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation. [Article VI, Section 28(3)]

All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. [Article XIV, Section 4(3)]

Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax. [Article XIV, Section 4(4)]

This means that taxes should comply with the requisites of a valid imposition of tax. The following are the requisites for a valid imposition of tax:

For a public purpose;
Rule of taxation should be uniform;
The person or property taxed is within the jurisdiction of the taxing authority;
Assessment and collection is in consonance with the due process clause; and
The tax must not infringe on the inherent and constitutional limitations of the power of taxation.

Scope of Legislative Power to Tax

The power to tax includes the power to impose taxes, grant tax exemptions, and condonations, to specify or provide for administrative as well as judicial remedies. In particular, Congress has the power to determine the following:

Amount or Rate of tax
Subjects of taxation (persons, property, occupation, excises or privileges to be taxed, provided they are within the taxing jurisdiction)
Kind of tax to be collected
Method of collection (not exclusive to the Congress)
Apportionment of the tax (whether the tax shall be of general application or limited to a particular locality, or partly general and partly local)
Purposes for which taxes shall be levied, provided they are public purposes
Situs of taxation

Classification of Taxes

As to Object

Personal, Poll or Capitation Tax. A tax of a fixed amount imposed on persons residing within a specified territory, whether citizens or not, without regard to their property or the occupation or business in which they may be engaged (e.g. community (formerly residence) tax).

Property Tax. A tax imposed on property, real or personal, in proportion to its value or in accordance with some other reasonable method of apportionment (e.g., real property tax).

Privilege/Excise Tax. Any tax which does not fall within the classification of a poll tax or a property tax.

As to Burden

Direct Taxes. Taxes which are demanded from persons who also shoulder them; taxes for which the taxpayer is directly or primarily liable, or which he cannot shift to another (e.g., income tax, estate tax, donor’s tax, community tax)

Indirect Taxes. Taxes which are demanded from one person in the expectation and intention that he can shift the burden to someone else (e.g., VAT, percentage tax, excise taxes on specified goods, customs duties).

As to Rates

Specific Tax. A tax of a fixed amount imposed by the head or number or by some other standard of weight or measurement.

Ad Valorem Tax. A tax of a fixed proportion of the value of the property with respect to which the tax is assessed.

As to Purpose

General or Fiscal Tax. Levied for the general or ordinary purposes of the Government, i.e., to raise revenue for governmental needs (e.g., income tax, VAT, and almost all taxes).

Special/Regulatory/Sumptuary Tax. Levied for special purposes, i.e., to achieve some social or economic ends irrespective of whether revenue is actually raised or not (e.g., protective tariffs or customs duties on imported goods to enable similar products manufactured locally to compete with such imports in the domestic market).

As to Scope

National. Taxes imposed by the national government (e.g., national internal revenue taxes, customs duties, and national taxes imposed by laws).

Municipal or Local. Taxes imposed by local governments (e.g., business taxes that may be imposed under the Local Government Code, professional tax).

As to Graduation

Progressive. The rate of tax increases as the tax base or bracket increases, e.g., income tax for individual; estate tax and donor’s tax before TRAIN Law.

Regressive. The rate of tax decreases as the tax base or bracket increases. There is no regressive tax in the Philippines.

Proportionate. The rate of tax is based on a fixed percentage of the amount of the property, receipts or other basis to be taxed, e.g., real estate tax, VAT, and other percentage taxes; estate tax and donor’s tax upon the effectivity of TRAIN Law.

Digressive. A fixed rate is imposed on a certain amount and diminishes gradually on sums below it. The tax rate in this case is arbitrary because the increase in tax rate is not proportionate to the increase of tax base.

Characteristics of Taxation

The following are the characteristics of taxation (CUPS):

Comprehensive. It covers persons, businesses, activities, professions, rights, and privileges.

Unlimited. It is so unlimited in force and searching in the extent that courts scarcely venture to declare that it is subject to any restrictions, except those that such rests in the discretion of the authority which exercises it (Tio v. Videogram Regulatory Board, G.R. No. 75697, June 18, 1987).

Plenary. It is complete. Under NIRC, the BIR may avail of certain remedies to ensure the collection of taxes. Taxes, being the lifeblood of the government, that should be collected without unnecessary hindrance, every precaution must be taken not to unduly suppress it (Republic v. Caguioa, 536 SCRA 193 [2007]).

Supreme. It is supreme insofar as the selection of the subject of taxation is concerned, but it does not mean that it is superior to the other inherent powers of the State.

Construction and Interpretation of Tax Laws, Rules and Regulations

When the language of tax law is clear and unequivocal, it must be given its literal application and applied without interpretation.

Where there is doubt, tax laws are construed strictly against the government and liberally in favor of the taxpayer. In the case of tax exemption, it must be shown to exist clearly and categorically and supported by clear legal provisions.

Prospectivity of Tax laws

Tax laws are prospective in operation, unless the contrary is provided.

Tax laws may be applied retroactively provided it is expressly declared or it is clearly the legislative intent (e.g., increase taxes on income already earned) except when retroactive application would be so harsh and oppressive.

Imprescriptibility of Taxes

Unless otherwise provided by law, taxes are imprescriptible.

Summary of prescription on assessment and collection under National Internal Revenue Code:

3 years	Prescription of assessment AND collection from the: prescribed last day of filing of returns (even if return was filed earlier than the deadline); OR the day when the return was actually filed if filed later than the last day of filing [Sec. 203, NIRC] whichever comes earlier.
10 years	Prescription of assessment in cases of: false or fraudulent return with intent to evade tax; OR failure to file a return [Sec. 222, NIRC] From the discovery of the fraud, falsity, or omission.
5 years	Prescription of collection of tax if: assessed within the 3-year and 10-year prescriptive periods assessed within the extended period agreed upon by the Commissioner and taxpayer (waiver of the prescriptive period) Collected by distraint, levy or by a proceeding in court. [Sec. 222, NIRC]

Customs Modernization and Tariffs Act provides that “[i]n the absence of fraud and when the goods have been finally assessed and released, the assessment shall be conclusive upon all parties three (3) years from the date of final payment or duties, or upon completion of the post-clearance audit.

The LGC prescribes prescriptive periods for the assessment from the date they became due (5 years) and collection (5 years) of taxes (including Real Property Taxes) from the date of assessment by administrative or judicial action. In case of fraud or intent to evade the payment of taxes, fees, or charges, the same may be assessed from discovery of the fraud or intent to evade payment (10 years).

Impact and Incidence

Impact and Incidence of taxation may be distinguished as follows:

Impact	Incidence
Initial burden of tax	Ultimate burden of the tax
At the point of imposition	At the point of settlement
Fall upon the person from whom the tax is collected	Rests on the person who pays it eventually
May be shifted	Cannot be shifted

Impact in VAT is on the producer who shifts the burden to the customer who finally bears the incidence of the tax

Exemption from Taxation

Tax exemption is the grant of immunity to particular persons or corporations or to person or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay. It is an immunity or privilege; it is freedom from a financial charge or burden to which others are subjected. It is strictly construed against the taxpayer.

Tax exemption is revocable by the government. However, contractual tax exemptions may not be unilaterally so revoked by the taxing authority without thereby violating the non-impairment clause of the Constitution.

Rationale

Its avowed purpose is some public benefit or interest which the lawmaking body considers sufficient to offset the monetary loss entailed in the grant of the exemption.
The theory behind the grant of tax exemptions is that such act will benefit the body of the people. It is not based on the idea of lessening the burden of the individual owners of property.

Nature

Merely personal privilege. Cannot be assigned or transferred without the consent of the legislature.
Generally revocable. Contractual tax exemptions may not be unilaterally so revoked.
Implies a waiver on the part of the government. Hence, it exists only by virtue of an express grant and must be strictly construed.
Not necessarily discriminatory. Otherwise, it may be challenged as violative of the equal protection guarantee or the uniformity rule.

Grounds

Contract. The grant of tax exemption is usually contained in the charter of the corporation to which the exemption is granted.
Public policy.To encourage new and necessary industries, or to foster charitable institutions.
Reciprocity. To reduce the rigors of international double or multiple taxation, tax exemptions maybe granted in treaties.

Equity is not a ground for tax exemption, but it could be a ground for tax condonation.

Kinds

Express. Expressly granted by the Constitution, statutes, treaties, franchises or similar legislative acts.
Implied. When particular persons, properties, or exercise are deemed exempt as they fall outside the scope of the taxing provision itself.
Contractual. Are those agreed to by the taxing authority in contract lawfully entered into by them under enabling laws.

Revocation

General Rule: Revocable by the government.

Exception: Contractual tax exemptions may not be unilaterally so revoked by the taxing authority without thereby violating the non-impairment clause of the Constitution.

Interpretation of Tax Exemption

General Rule:

In the construction of tax statutes, exemptions are not favored and are construed strictissimi juris against the taxpayer. Taxation is the rule; exemption is the exception.

Exception:

When the law itself expressly provides for a liberal construction thereof.
In cases of exemptions granted to religious, charitable and educational institutions or to the government or its agencies or to public property because the general rule is that they are exempt from tax.

Tax Amnesty

A tax amnesty partakes of absolute forgiveness or waiver by the Government of its right to collect what otherwise would be due it, and in this sense, prejudicial thereto, particularly to give tax evaders, who wish to relent and are willing to reform a chance to do so and become a part of the new society with a clean slate.

	Tax Amnesty	Tax Exemption
Benefit	Immunity from civil, criminal, administrative liability arising from non-payment of taxes	Immunity from civil liability (relief from paying taxes)
Coverage	Past tax liability	Future tax liability
Actual Revenue Loss	Yes	None

Prohibition on Compensation and Set-off

Internal revenue taxes cannot be the subject of set-off or compensation.

However, if the claims against the government have been recognized and an amount has already been appropriated for that purpose. Where both claims have already

become due demandable, and
fully liquidated,

compensation takes place by operation of law under Art. 1200 in relation to Articles 1279 and 1290 of the New Civil Code, and both debts are extinguished to the concurrent amount.

It involves a reduction of the taxpayer’s liability.

Compromise

The requisites of a tax compromise are

The taxpayer must have a tax liability.
There must be an offer (by the taxpayer or Commissioner) of an amount to be paid by the taxpayer.
There must be acceptance (by the Commissioner or the taxpayer, as the case may be) of the offer in settlement of the original claim.

Characteristics of Taxes

The following are the characteristics of taxes.

Enforced contribution by virtue of lifeblood theory.

Generally payable in the form of money. The law may provide payment in kind (e.g. backpay certificates under Sec. 2, R.A. No. 304, as amended);

Proportionate in character. Taxation is based on the ability to pay.

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation [Sec. 28 (1), Art. VI, 1987 Constitution];

Personal to the taxpayer;

Levied on persons, property, rights, acts, privileges, or transactions;

Levied by the State which has jurisdiction or control over the subject to be taxed;

Levied by the law-making body of the State. The power to tax is inherently legislative. It cannot be delegated subject to certain exceptions;

Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments. [Sec. 5, Art. X, 1987 Constitution];

Levied for public purpose. Revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private persons;

Commonly required to be paid at regular periods or intervals every year.

Tax and Other Forms of Exactions

Tariff

Taxes	Tariff
All embracing term to include various kinds of enforced contributions upon persons for the attainment of public purposes	A kind of tax imposed on articles which are traded internationally

Toll

Taxes	Toll
Paid for the support of the government	Paid for the use of another’s property.
Demand of sovereignty	Demand of proprietorship
Generally, no limit on the amount collected as long as it is not excessive, unreasonable or confiscatory	Amount paid depends upon the cost of construction or maintenance of the public improvement used.
Imposed only by the government	Imposed by the government or by private individuals or entities.

License fee

Taxes	License fee
Imposed under the taxing power of the state for purposes of revenue.	Levied under the police power of the state.
Forced contributions for the purpose of maintaining government functions.	Exacted primarily to regulate certain businesses or occupations.
Generally unlimited as to amount	Should not unreasonably exceed the expenses of issuing the license and of supervision.
Imposed on persons, property and the right to exercise a privilege.	Imposed only on the right to exercise a privilege
Failure to pay does not necessarily make the act or business illegal. Penalty for non-payment: Surcharges Imprisonment (except poll tax).	Failure to pay makes the act or business illegal.

Special assessment

Taxes	Special assessment
Levied not only on land (e.g. Real Property Tax)	Levied only on land
Imposed regardless of public improvements	Imposed because of an increase in value of land benefited by public improvement
Contribution of a taxpayer for the support of the government	Contribution of a person for the construction of a public improvement
It has general application both as to time and place	Exceptional both as to time and locality

Penalty

Taxes	Penalty
Violation of tax laws may give rise to imposition of penalty	Any sanction imposed as a punishment for violation of law or acts deemed injurious
Generally intended to raise revenue	Designed to regulate conduct
May be imposed only by the government	May be imposed by the government or private individuals or entities
Cannot be a subject of set off or compensation	Can be a subject of set off or compensation (see Art. 1279, Civil Code)

Principles of a Sound Tax System

The following are the principles of a sound tax system.

Fiscal Adequacy

The collection of the government must be adequate to sustain its legitimate expenses. This requires that sources of revenues must be adequate to meet government expenditures and their variations.

Administrative Feasibility

Tax laws should be capable of just and effective administration that even an ordinary taxpayer may comprehend. Each tax should be:

capable of uniform enforcement by government officials,
convenient as to the time, place, and manner of payment, and
not unduly burdensome upon, or discouraging to business activity.

Theoretical Justice or Equality

The rule of taxation shall be uniform and equitable.

Uniform means all subjects and objects similarly situated shall be treated alike both in privileges and liabilities. Equitable means tax imposition must be fair, just, reasonable, and proportionate to the taxpayer’s ability to pay.

Note that non-observance of the above principles will not necessarily render the tax imposed invalid except to the extent those specific constitutional limitations are violated.

Tax Avoidance vs. Tax Evasion

Tax avoidance refers to the exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income in order to avoid or reduce tax liability. It is politely called “tax minimization” and is NOT punishable by law.

Tax Evasion is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax. It is also known as “tax dodging.” It is punishable by law. The elements of tax evasion are

The end to be achieved. Example: the payment of less than that known by the taxpayer to be legally due, or in paying no tax when such is due.
An accompanying state of mind described as being “evil,” “in bad faith,” “willful” or “deliberate and not accidental.”
A course of action (or failure of action) that is unlawful.

Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the circumstances of the case. Thus:

The failure of the taxpayer to declare for taxation purposes his true and actual income derived from his business for two consecutive years has been held as an indication of his fraudulent intent to cheat the government of its due taxes.

The substantial underdeclaration of income in the income tax returns of the taxpayer for four (4) consecutive years coupled with his intentional overstatement of deductions justifies the finding of fraud.

Situs of Taxation

Situs of taxation literally means the place of taxation. The state where the subject to be taxed has a situs may rightfully levy and collect the tax; and the situs is necessarily in the state which has jurisdiction or which exercises dominion over the subject in question. Within the territorial jurisdiction, the taxing authority may determine the situs.

Factors that Determine Situs are

Nature of the tax;
Subject matter of the tax (person, property, act or activity);
Possible protection and benefit that may accrue both to the government and the taxpayer;
Citizenship of the taxpayer;
Residence of the taxpayer;
Source of income.

Double Taxation

Means taxing twice the same taxpayer for the same tax period upon the same thing or activity, when it should be taxed once, for the same purpose, and with the same kind of character of tax.

There are two types of double taxation. Direct and Indirect Double Taxation.

Direct Double Taxation (Strict sense)

There is direct double taxation when all of the following requisites are present:

Both taxes must be imposed on the same property or subject matter;
For the same purpose;
By the same State, Government, or taxing authority;
Within the same territory, jurisdiction or taxing district;
During the same taxing period; and
Of the same kind or character of tax.

Indirect Double Taxation (Broad sense)

There is double taxation in the broad sense or there is indirect duplicate taxation if any of the elements for direct duplicate taxation is absent.

Constitutionality of Double Taxation

Double taxation in its stricter sense is undoubtedly unconstitutional but that in the broader sense is not necessarily so.

Our Constitution does not prohibit double taxation. However, double taxation will not be allowed if it results in a violation of the equal protection clause.

Modes of relief from double taxation

Certain reliefs are available to taxpayers to eliminate or mitigate the effect of double taxation:

Allowing reciprocal exemption either by law or by treaty;
Allowance of tax credit for foreign taxes paid;
Allowance of deductions such as for foreign taxes paid, and vanishing deductions in estate tax; OR
Reduction of Philippine tax rate.

Stages or Aspects of Taxation

The exercise of taxation involves the following stages:

Legislative Act: Levy or imposition. This process involves the passage of tax laws or ordinances through the legislature. It contemplates the determination of the subject of taxation, the purpose for which the tax shall be levied, fixing the rate of taxation, and the rules of taxation in general. It also involves the granting of tax exemptions, tax amnesties, or tax condonation.

Executive Act: Assessment and collection. This process involves the act of administration and implementation of tax laws by the executive through its administrative agencies such as the Bureau of Internal Revenue or Bureau of Customs. The act of assessing and collecting taxes is administrative in character, and therefore can be delegated.

Taxpayer’s Act: Payment. This process involves the act of compliance by the taxpayer in contributing his share to pay the expenses of the government. Payment of tax also includes the options, schemes, or remedies as may be legally open or available to the taxpayer.

Taxpayer’s and Executive Act: Refund. The recovery of any alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively, or in any manner wrongfully collected.

Organization and Function of the Bureau of Internal Revenue

The Bureau of Internal Revenue shall be under the supervision and control of the Department of Finance. Here is the approved organizational structure of the BIR.

The Bureau of Internal Revenue shall have a chief to be known as Commissioner of Internal Revenue and four (4) assistant chiefs to be known as Deputy Commissioners.

Powers and Duties of the Bureau of Internal Revenue

To assess and collect national internal taxes, fees, and charges;
To enforce all forfeitures, penalties, and fines connected therewith;
To execute judgment in all cases decided in its favor by the CTA and the ordinary courts; and
To effect and administer the supervisory and police powers conferred upon it by the Tax Code or other special laws.

Powers of the BIR Commissioner

Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases (Sec. 4)
Power of the Commissioner to Obtain Information, and to Summon, Examine, and Take Testimony of Persons (Sec. 5)
Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement (Sec. 6)
Authority of the Commissioner to Delegate Power (Sec. 7)
Assignment of Internal Revenue Officers and Other Employees to Other Duties. (Sec. 17)
Power to apply accounting period (Sec. 43)
Allocation of Income and Deductions. (Sec. 50)
Power of the Commissioner to Suspend the Business Operations of a Taxpayer. (Sec.115)
Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes (Sec. 204)
Power to file civil and criminal actions. (Sec. 220, 221)

Rule-making authority of the Secretary of Finance

SEC. 244. Authority of Secretary of Finance to Promulgate Rules and Regulations. - The Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of this Code.

SEC. 245. Specific Provisions to be Contained in Rules and Regulations. - The rules and regulations of the Bureau of Internal Revenue shall, among other things, contain provisions specifying, prescribing or defining:

(a) The time and manner in which Revenue Regional Directors shall canvass their respective Revenue Regions for the purpose of discovering persons and property liable to national internal revenue taxes, and the manner in which their lists and records of taxable persons and taxable objects shall be made and kept;

(b) The forms of labels, brands or marks to be required on goods subject to an excise tax, and the manner in which the labelling, branding or marking shall be effected;

(c) The conditions under which and the manner in which goods intended for export, which if not exported would be subject to an excise tax, shall be labelled, branded or marked;

(d) The conditions to be observed by revenue officers respecting the institutions and conduct of legal actions and proceedings;

(e) The conditions under which goods intended for storage in bonded warehouses shall be conveyed thither, their manner of storage and the method of keeping the entries and records in connection therewith, also the books to be kept by Revenue Inspectors and the reports to be made by them in connection with their supervision of such houses;

(f) The conditions under which denatured alcohol may be removed and dealt in, the character and quantity of the denaturing material to be used, the manner in which the process of denaturing shall be effected, so as to render the alcohol suitably denatured and unfit for oral intake, the bonds to be given, the books and records to be kept, the entries to be made therein, the reports to be made to the Commissioner, and the signs to be displayed in the business or by the person for whom such denaturing is done or by whom, such alcohol is dealt in;

(g) The manner in which revenue shall be collected and paid, the instrument, document or object to which revenue stamps shall be affixed, the mode of cancellation of the same, the manner in which the proper books, records, invoices and other papers shall be kept and entries therein made by the person subject to the tax, as well as the manner in which licenses and stamps shall be gathered up and returned after serving their purposes;

(h) The conditions to be observed by revenue officers respecting the enforcement of Title III imposing a tax on estate of a decedent, and other transfers mortis causa, as well as on gifts and such other rules and regulations which the Commissioner may consider suitable for the enforcement of the said Title III;

(i) The manner in which tax returns, information and reports shall be prepared and reported and the tax collected and paid, as well as the conditions under which evidence of payment shall be furnished the taxpayer, and the preparation and publication of tax statistics;

(j) The manner in which internal revenue taxes, such as income tax, including withholding tax, estate and donor's taxes, value-added tax, other percentage taxes, excise taxes and documentary stamp taxes shall be paid through the collection officers of the Bureau of Internal Revenue or through duly authorized agent banks which are hereby deputized to receive payments of such taxes and the returns, papers and statements that may be filed by the taxpayers in connection with the payment of the tax: Provided, however, That notwithstanding the other provisions of this Code prescribing the place of filing of returns and payment of taxes, the Commissioner may, by rules and regulations, require that the tax returns, papers and statements that may be filed by the taxpayers in connection with the payment of the tax. Provided, however, That notwithstanding the other provisions of this Code prescribing the place of filing of returns and payment of taxes, the Commissioner may, by rules and regulations require that the tax returns, papers and statements and taxes of large taxpayers be filed and paid, respectively, through collection officers or through duly authorized agent banks: Provided, further, That the Commissioner can exercise this power within six (6) years from the approval of Republic Act No. 7646 or the completion of its comprehensive computerization program, whichever comes earlier: Provided, finally, That separate venues for the Luzon, Visayas and Mindanao areas may be designated for the filing of tax returns and payment of taxes by said large taxpayers.

For the purpose of this Section, 'large taxpayer' means a taxpayer who satisfies any of the following criteria:

(1) Value-Added Tax (VAT) - Business establishment with VAT paid or payable of at least One hundred thousand pesos (P100, 000) for any quarter of the preceding taxable year;

(2) Excise tax - Business establishment with excise tax paid or payable of at least One million pesos (P1, 000,000) for the preceding taxable year;

(3) Corporate Income Tax - Business establishment with annual income tax paid or payable of at least One million pesos (P1,000,000) for the preceding taxable year; and

(4) Withholding tax - Business establishment with withholding tax payment or remittance of at least One million pesos (P1,000,000) for the preceding taxable year.

Provided, however, That the Secretary of Finance, upon recommendation of the Commissioner, may modify or add to the above criteria for determining a large taxpayer after considering such factors as inflation, volume of business, wage and employment levels, and similar economic factors.

The penalties prescribed under Section 248 of this Code shall be imposed on any violation of the rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, prescribing the place of filing of returns and payments of taxes by large taxpayers.

SEC. 246. Non- Retroactivity of Rulings. - Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers, except in the following cases:

(a) Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the Bureau of Internal Revenue;

(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith.

Request for Ruling with the Law and Legal Divisions

The Commissioner of Internal Revenue (“CIR”) has issued Revenue Memorandum Order (“RMO”) No. 9-2014 dated 6 February 2014 to set guidelines in the processing of requests for rulings filed with the BIR-Law and Legislative Division.

The salient portions of the RMO are as follows:

Tax Rulings

“Tax Rulings” are defined as factual and circumstantial official positions of the BIR on inquiries of taxpayers who request clarification on certain provisions of the Tax Code, other laws, or their implementation, usually for the purpose of seeking tax exemptions.

No-Ruling Areas

The RMO identifies the following as “No-Ruling Areas”:

matters declared as “No-Ruling Areas” in Revenue Bulletin No. 1-2003, as amended by Revenue Bulletin No. 2-2003;
non-compliance with any of the requirements for the filing of a ruling as described in the RMO;
tax planning advice and “approval” of tax planning arrangements; and
matters that can be determined through another process (i.e. appeal).

The Law and Legislative Division will also not issue a ruling in response to a request if (i) the taxpayer has directed a similar inquiry to another office of the Bureau; (ii) the same issue involving the same taxpayer or a related taxpayer is pending in a case in litigation; or (iii) the same issue involving the same taxpayer is subject of a pending investigation, on-going audit, administrative protest, claim for refund or issuance of tax credit certificate.

Hypothetical Questions

A ruling will not be issued on alternative plans of proposed transactions or on supposed situations, otherwise referred to as “hypothetical questions” under Revenue Bulletin No. 1-2003.

Letter Request for Ruling

The letter request must be a sworn statement and must contain certain required information and affirmations.

Unless otherwise provided, all letter requests must be addressed to

The Chief

Law and Legislative Division

BIR National Office Building

BIR Road, Quezon City.

General Documentary Requirements

In addition to the specific documentary requirements provided under the applicable revenue issuances, the request must be accompanied by “Certified True Copies” of documents material to the transaction and by “Special Power of Attorney” or “Authorization” in case filed by a representative.

Only certified true copies, not originals, each labeled alphabetically and attached to the request, must be submitted.

Requests with incomplete and insufficient documents will be immediately denied and communicated to the party while those with complete documents shall be issued a ruling affirming or denying the request. The CIR shall be the signing authority unless delegated to another official of the Bureau.

For a ruling to be valid, a taxpayer must have fully and accurately described the transaction. Rulings requested by other taxpayers may only be used as “useful information” and not as precedents.

The BIR shall not also issue a ruling involving local taxes, customs duties or other taxes, fees and charges not within the powers of the Bureau to assess and collect.

Effectivity

This RMO is effective immediately.